ENGINEERING & LAW
INGENIEUR
Employer’s
Rights to
Set-Off
Payment
Claims by
Contractor
By Teng Kam Wah,
Dr Rosli Said and
Dr Mohd Suhaimi Bin Mohd Danuri,
Faculty of Built Environment, University
of Malaya
I
n an engineering or construction situation,
when faced with a claim by a contractor for
payment, the employer will almost certainly
wish to set off such a claim by a cross-claim of
his own against the contractor for any sums owing
by the contractor to him. Such a cross-claim by
the employer may involve damages for defective
work and delayed performance. The advantage
of such a set-off device is that the contractor is
precluded from obtaining judgment to the full
extent of his claim. This leaves the employer with
the right to take legal action against the contractor
for recovery of the employer’s claim against the
contractor. If the contractor gets his money first,
there is no certainty that the contractor will be able
or will want to pay the employer in the event that
the employer succeeds in his action against the
contractor. Set-off is a general principle founded
in simple convenience and fairness.
There are two types of set-off available in
Malaysia: abatement and equitable set-off. The
exercise of a right of deduction or set-off is in
essence a provisional act. It does not decide
anything finally. It does not prevent either party
from subsequently proving his claim or cross6
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VOL 55 JUNE 2013
claim. It has no effect on the final outcome of the
dispute.
Unlike a set-off, a counterclaim is in effect an
action by the defendant against the plaintiff. It is
not restricted to debts or liquidated damages. It is
not necessary that the claim should be analogous
to that of the plaintiff’s. A claim based on contract
may be opposed to one founded on tort, or viceversa (Stooke v Taylor (1880) 5 QBD 569).
A cross-claim which is accepted as a defence
of set-off has the effect of extinguishing either
the whole or part of the plaintiff’s claim (In re A
Bankruptcy Notice [1934] Ch 431). In Permodalan
Plantations Sdn Bhd v Rachuta Sdn Bhd [1985]
1 MLJ 157, Salleh Abbas LP explained as follows:
A counterclaim on the other hand is also
a cross-claim which a defendant has
against a plaintiff but in respect of which
the defendant can bring a separate action
against the plaintiff if he wishes to do
so. Thus, to all intents and purposes a
counterclaim is a separate and independent
action by the defendant, which the law
allows to be joined to the plaintiff’s action in
order to avoid multiplicity or circuitry of suits.
ABATEMENT
The doctrine of abatement or common law set-off
was developed by the courts to allow a party to a
contract for the purchase of goods or services or
both to obtain a reduction in the price payable to
the extent that the value of the goods or services
has been diminished by a breach of contract by
the seller. In Thornton v Place (1832) 1 M&R 218,
the plaintiffs’ claims for damages for slating work
done were resisted by a defence of defective work.
The court held that the plaintiffs were entitled
to the contract price less a deduction of a sum
necessary to alter the work to make it fit the
specification.
The principle laid down in Mondel v Steel
(1841) 8 M & W 858 was that when the buyer
of goods is sued by the seller for the price, “it is
competent for the defendant not to set-off by a
proceeding in the nature of a cross-action, the
amount of damages which he has sustained by
a breach of the contract, but simply to defend
himself by showing how much less the subject
matter of the action was worth by reason of the
breach of contract”.